by Paul Hoffmeister, Portfolio Manager and Chief Economist
Last Friday, the nonfarm payrolls report from the Bureau of Labor Statistics revealed that cracks in the labor market are starting to appear. Specifically, only 22,000 jobs were created in August; this compared to about 168,000 per month in 2024. At the same time, the unemployment rate rose to 4.3%, up from a cycle low of 3.5% during Q3 2022. Excluding the Covid pandemic, job growth last month was the lowest since 2010. Although nearly 31,000 jobs were added in the health care sector, job losses occurred in information, business services, financial activities, manufacturing and the federal government sectors. Then on Tuesday morning, the Bureau of Labor Statistics announced that the number of workers on payrolls for the twelve months ended March 2025 will likely be revised lower by over 900,000. The news further makes the case that the labor market is slowing meaningfully.
Despite concerns among some policymakers about inflation, the recent employment data strongly suggests that the general perception of the balance of economic risks is now weighted toward a cooling economy than worsening inflation. As a result, financial markets are pricing an almost certain probability of a rate cut at the FOMC’s next meeting on September 17, according to the CME’s FedWatch monitor. For markets today, the question seems to be not whether there will be a rate cut, but how large will it be? As of last Friday, markets were pricing in almost a 90% chance of a quarter-point cut, and 10% chance of a ‘jumbo’ 50 basis point cut.
For investors, the employment environment is important because it has historically correlated with equity indices and corporate earnings. A weakening job market indicates weakening economic momentum. And, according to the Bureau of Economic Analysis, consumer spending makes up approximately two-thirds of the US economy. Therefore, when job growth stalls and unemployment rises, income insecurity among US households increases, which in turn reduces consumption and business sales/profits. Ultimately, corporate stock valuations can suffer.
If history is any guide, a critical variable that will impact US equity markets during the coming year will be how the labor market continues to evolve. Last week’s nonfarm payrolls report suggests a loss of momentum in hiring. Fortunately, the economy is not yet experiencing a sustained reduction of jobs each month. Instead, the payrolls report is suggesting that there’s simply little hiring and no major, widespread layoffs as of yet. And as the labor market experiences this slowdown, markets expect the Fed to act next week with its own monetary stimulus to prevent things from getting much worse.
Paul Hoffmeister is Chief Economist and Portfolio Manager at Camelot Portfolios, managing partner of Camelot Event-Driven Advisors (CEDA), and co-portfolio manager of the Camelot Event-Driven Fund (EVDIX • EVDAX).
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